Latency Reduction and Market Quality: The Case of the Australian Stock Exchange

Posted: 23 Apr 2016

See all articles by Hamish Murray

Hamish Murray

Deakin University - Deakin Business School

Thu Phuong Pham

University of Adelaide; IPAG Business School; Financial Research Network (FIRN)

Harminder Singh

Deakin University - School of Accounting, Economics and Finance

Date Written: September 9, 2015

Abstract

This study investigates the role of latency in market quality in the Australia Securities Exchange following the introduction of the Integrated Trading Platform (ITS) and ASXTrade. We find that the reduction in system latency from 70 miliseconds to 30 miliseconds (ITS) improved liquidity. However, the lower latency has not had a long lasting downward effect on spreads, as there was no discernible reduction in trading costs when institutional traders already had access to lower-latency co-locations. We contribute to the literature by reporting that low latency improves market liquidity, but privileged participants that have access to trading information prior to others may induce greater information asymmetry and adverse selection.

Keywords: Latency, spreads, ASXTrade, ITS, market liquidity

JEL Classification: G1

Suggested Citation

Murray, Hamish and Pham, Thu Phuong and Singh, Harminder, Latency Reduction and Market Quality: The Case of the Australian Stock Exchange (September 9, 2015). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2658075

Hamish Murray

Deakin University - Deakin Business School ( email )

Australia

Thu Phuong Pham (Contact Author)

University of Adelaide ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Harminder Singh

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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